New Aluminum Hedging Feature Coming to LME

The London Metal Exchange announced a new feature for its exchange, giving traders more options than ever. Specifically, the exchange will give traders the ability to hedge aluminum prices, as the commodity continues to rise due to lengthy delivery times that have thrown a wrench in a number of supply chains [for more commodity news and analysis subscribe to our free newsletter].

The new contract will be physically settled and will cover aluminum in North America, Western Europe and Asia. A specific launch date for the contract has yet to be set, but it appears that a North American contract will begin trading sometime in May.

“The LME remains committed to addressing the underlying causes of queues, and does not believe that a premium hedging contract is a substitute for such action. However, given the likely timescale for queues to diminish at LME warehouses (including the potential delays arising from legal proceedings), a premium hedging contract may be of assistance to the market,” said Matthew Chamberlain of the LME.

The Origins

Aluminum prices have continued to rise not necessarily because the commodity has become more valuable or scarce, but simply because the wait times for physical delivery have steadily grown longer. In some cases, the wait has lasted more than a year. It appears that the U.S. feels two major financial institutions are to blame: JP Morgan (JPM) and Goldman Sachs (GS). Last year, the U.S. filed a lawsuit alleging subsidiaries of the two giants colluded to inflate aluminum prices and slow the wait times for delivery [see also JP Morgan Escapes Silver Manipulation Charges].

Though both companies have denied allegations and even some LME officials have defended them, the suit is still pending. In all likelihood, the case will end with an out-of-court settlement as they so often do with big banks.

Regardless of whether or not the price of aluminum has been fixed or manipulated, the new contracts are a step in the right direction for the LME. This opens the doors up for traders to better protect themselves and will likely add liquidity to the aluminum market. Keep an eye out for any more developments over the next few months, both on the new contracts and the lawsuit against JP Morgan and Goldman.

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